Economics from a people first point-of-view
June 20th, 2012 — Investing
If you’ve seen the movie, Oceans 13, you know how the results of casino games can be rigged. Loaded dice, marked cards, a hidden foot pedal that manipulates a roulette wheel, payoffs to employees, and rigged slot machines. In this movie fantasy, the callous owner of the casino is cheated. In real life it is more likely the casino’s customers will be cheated.
June 13th, 2012 — Investing
The SEC requires that the words “Past Performance is No Guarantee of Future Performance” be included in every mutual fund prospectus. This notice should be posted in casinos, not in prospectuses.
The “law of large numbers” which is often called the “law of averages” is a corollary of the law of probability in statistics. Probability applies to events involving inanimate objects like numbered balls, dice, cards, etc. Probability gives the odds of any particular result from manipulating those objects.
These odds are based on probabilities, i.e., the past performance of the object(s) being used for prediction. However, the law of large numbers says: in the short run past performance in casino games is NOT a predictor of future results. Continue reading →
June 6th, 2012 — Investing
We all know investing is risky. People can lose a lot of money as well as gain from investing. But most people never ask, “What kind of gambling is investing?” Why is this important? When it comes to investing people often confuse the need for luck with the need for skill.
A stock is “a piece of the pie”. But what is that pie worth? How much is our piece of the pie worth? After an IPO takes place, it’s anyone’s guess how much a stock is really worth. At the end of the day, the price of a stock is set by trading (i.e., betting on whether its price will rise or drop). The more people bet that the stock’s price will rise, the more it does rise, and vice versa.
Gambling games are based on two mutually exclusive principles: (1) the law of probability, or “pure luck” and (2) human intelligence. Continue reading →